Hi,
I was doing some reading the other day about a article written by Ed Chan and would like some people thoughts about the below scenario, of the chance to avoid paying Land Tax in NSW, relating to property in a family trust. Basically by granting a life interest on the property (with conditions, so you don’t lose the asset protection) you can legally avoid paying it.... any thoughts
Quote:-
Mr and Mrs Smith are medical specialists and in highly litigious industries where they can both get sued, so they naturally did not want any assets in their own name and they were in the market for a new home.
They had visited one of the top 3 largest Accountancy Firms in the city who advised them that they should purchase their home in a Family Trust. As the property was held in a Trust it would be protected from litigation because the home was not in their name. While this is correct, it won’t safeguard the property from a divorce settlement. The only protection from a divorce settlement is getting a prenuptial agreement before getting married.
A year later Mr and Mrs Smith receive a land tax bill of $46,000 for this home. This will be an annual land tax bill for the rest of the time they owned that property.
If you own your own home and wonder why you have not received a land tax bill from the Office of State Revenue, it’s because under normal circumstances there is no land tax liability when the property is your home. However when a Trust owns it (this was a NSW case) it’s deemed an investment property subject to land tax.
In addition, Trusts in NSW do not get a land tax threshold so land tax is paid from the very first dollar.
They then visited 3 other large Law Firms in the city in an attempt to get a solution. They all came up with various “band aid” solutions to try and get them out of this problem. The solutions they provided went from converting the Family Trust to a Fixed Trust to qualify for the land tax threshold in NSW, thus reducing the land tax only by $6,000, to other elaborate schemes which cost them tens of thousands of dollars in legal costs but still did not eradicate the land tax bill completely.
They were contemplating selling the property when they were referred to us. They were understandably extremely sceptical when they came in for their meeting, already having accepted that there was nothing more they could do since they had been to the large end of town and paid over $50,000 in accounting and solicitor fees.
Our fee was $395 for a couple of hour’s consultation. They came to us from a referral who had told them that if they wanted property advice there was no one better, so reluctantly they came in.
We immediately advised them we could eliminate the land tax bill completely by the granting of a Life Interest back to them.
There was absolute silence and disbelief because “they had been to see so many others (quote) and no one could come up with an easy and cost effective solution.”
“Are you sure this is legal?” they asked.
In NSW one can grant a Life Interest to a third party and what they use the premises for will determine the tax liability. As it was used as their home, they could apply to be exempt from land tax. Naturally a life interest is an asset, so from an asset protection point of view we had to build into the agreement the granting that the life interest ceases to exist if they were sued.
Life interests are very common. The most common way that Life Interests are used is when someone wants their home to go to their 3 children but they may want their disabled child to live out their life in the house. So to protect this child from being thrown out by the other children a Life Interest is granted to the disabled child allowing her to stay until she passes.
There is no stamp duty in the granting of a life interest in NSW but there are different rules for different States. For example in Queensland stamp duty is payable. One must get individual advice before acting on this because everyone’s circumstances are different and there are different laws in the different States.
I was doing some reading the other day about a article written by Ed Chan and would like some people thoughts about the below scenario, of the chance to avoid paying Land Tax in NSW, relating to property in a family trust. Basically by granting a life interest on the property (with conditions, so you don’t lose the asset protection) you can legally avoid paying it.... any thoughts
Quote:-
Mr and Mrs Smith are medical specialists and in highly litigious industries where they can both get sued, so they naturally did not want any assets in their own name and they were in the market for a new home.
They had visited one of the top 3 largest Accountancy Firms in the city who advised them that they should purchase their home in a Family Trust. As the property was held in a Trust it would be protected from litigation because the home was not in their name. While this is correct, it won’t safeguard the property from a divorce settlement. The only protection from a divorce settlement is getting a prenuptial agreement before getting married.
A year later Mr and Mrs Smith receive a land tax bill of $46,000 for this home. This will be an annual land tax bill for the rest of the time they owned that property.
If you own your own home and wonder why you have not received a land tax bill from the Office of State Revenue, it’s because under normal circumstances there is no land tax liability when the property is your home. However when a Trust owns it (this was a NSW case) it’s deemed an investment property subject to land tax.
In addition, Trusts in NSW do not get a land tax threshold so land tax is paid from the very first dollar.
They then visited 3 other large Law Firms in the city in an attempt to get a solution. They all came up with various “band aid” solutions to try and get them out of this problem. The solutions they provided went from converting the Family Trust to a Fixed Trust to qualify for the land tax threshold in NSW, thus reducing the land tax only by $6,000, to other elaborate schemes which cost them tens of thousands of dollars in legal costs but still did not eradicate the land tax bill completely.
They were contemplating selling the property when they were referred to us. They were understandably extremely sceptical when they came in for their meeting, already having accepted that there was nothing more they could do since they had been to the large end of town and paid over $50,000 in accounting and solicitor fees.
Our fee was $395 for a couple of hour’s consultation. They came to us from a referral who had told them that if they wanted property advice there was no one better, so reluctantly they came in.
We immediately advised them we could eliminate the land tax bill completely by the granting of a Life Interest back to them.
There was absolute silence and disbelief because “they had been to see so many others (quote) and no one could come up with an easy and cost effective solution.”
“Are you sure this is legal?” they asked.
In NSW one can grant a Life Interest to a third party and what they use the premises for will determine the tax liability. As it was used as their home, they could apply to be exempt from land tax. Naturally a life interest is an asset, so from an asset protection point of view we had to build into the agreement the granting that the life interest ceases to exist if they were sued.
Life interests are very common. The most common way that Life Interests are used is when someone wants their home to go to their 3 children but they may want their disabled child to live out their life in the house. So to protect this child from being thrown out by the other children a Life Interest is granted to the disabled child allowing her to stay until she passes.
There is no stamp duty in the granting of a life interest in NSW but there are different rules for different States. For example in Queensland stamp duty is payable. One must get individual advice before acting on this because everyone’s circumstances are different and there are different laws in the different States.